UK economy unexpectedly shrinks in October

According to data released just before the Bank of England’s final rate setting meeting of the year, the UK economy contracted unexpectedly in October. All three major sectors reported declines in production.

According to Office for National Statistics data released on Wednesday, the gross domestic product (GDP) fell by 0.3 percent between September and October. This was due to a decline in services, manufacturing, and construction output.

Reuters polled economists who expected that GDP would remain unchanged after a 0.2% increase the month before.

The readings, while volatile from month to month, add to the signs that the UK’s economy has lost its momentum in the final months of the year. The official figures showed a softening of the labour market, with slower wage increases.

The BoE will likely maintain interest rates unchanged on Thursday at a high of 5,25 percent, a level not seen in 15 years. However, investors are more interested in the messages the bank gives about the inflation outlook for next year.

The pound fell 0.3 percent against the dollar on Wednesday, to $1.2519. Traders increased their bets the central bank will be forced into further rate cuts in the coming year.

The markets now expect four rate reductions over the next 2024 years, which would bring rates down to 4.25 percent by the end of this year.

Gilts have strengthened as the yield on the benchmark UK 10-year government bond fell 0.05 percentage points, to 3.9%. Bond yields are inversely related to bond prices.

The figures released on Wednesday revealed the challenges the government faces when trying to stimulate the economy in the face of high interest rates, and high inflation pressures on the household incomes.

James Smith, Research Director at Resolution Foundation’s think-tank, said that the poor performance of UK economy in October will reignite speculation as to whether the country is back in recession, raising the question of output contracting across the final three months.

He said that the growth in the UK over the last 18 months had been the lowest since records began, outside of a major recession.

Suren Thiru is the economics director of the Institute of Chartered Accountants. He said that Rishi Sunak’s goal of growing the economy was at risk, as high inflation and borrowing rates were likely to “suppress the economic activity in December and November”.

Chancellor Jeremy Hunt stated: “It’s inevitable that GDP will be subdued while interest rates do their job in bringing down inflation.” The Autumn Statement announced significant reductions in taxation for businesses, which will allow the economy to grow again.

The GDP figures were affected by the wet weather. This is a disappointing beginning to the fourth quarter, after the economic stagnation during the three months prior to September.

The UK Economy in October was smaller than it had been at the beginning of the year, and also less than what it would have been by spring 2022. This is because high prices and borrowing costs were weighing on the growth.

This contraction could indicate that the BoE’s prediction of a UK economy growth of just 0.1 percent in the last three months is too optimistic. The BoE predicted last month that the UK economy would stagnate by 2024, as many households and businesses will face higher borrowing costs after their fixed-term contracts expire.

Paul Dales is the chief UK economist for Capital Economics. He said that the new figures “may nudge Bank of England closer to cutting interest rates.” However, he said policymakers would likely push back on Thursday against any idea of a reduction in rates.

He added that the economy would “go nowhere in Q4 again or is perhaps in the mildest mild recession”.

Samuel Tombs, Pantheon Macroeconomics, said that “October’s GDP drop adds to a growing list of recent data surprises on the downside. But we doubt the [Monetary Policy Committee] would change its tune to signal their willingness to reduce Bank Rates next year at this week’s meetings.”

ONS data revealed that the output of services fell by 0.2% in October. This was primarily due to a decline in the information and communications sector, which contributed the most to the fall in GDP.

In October, the output of consumer-facing businesses, like shops, restaurants, or hairdressers fell by 0.1 percent and remained 5 percent below pre-pandemic levels. The overall economy has recovered the ground that was lost during the pandemic.

ONS stated that the rainy weather had a negative impact on retail, pubs, and tourism. Met Office reports that this month was the sixth wettest in UK history, dating back to 1836.

Some local authorities also reported that the half-term holiday falling partly in November had an impact on recreation activities such as amusement parks and theatres.

Construction output fell by 0.5 percent in October due to the adverse weather. The manufacturing sector was responsible for the 0.8 percent drop in production output in October. This follows a month of no growth and an August with a 0.5 percent contraction.

data released on Tuesday showed the average wage growth was 7.3%, excluding bonuses. Or, it was 7.23%, including them. This is a much larger fall than expected from an earlier peak of 8.5%.